By Dan Freed and Nikhil Subba
(Reuters) - Wells Fargo & Co posted a better-than-expected quarterly profit, but revenue fell short of expectations as the lender's mortgage business continued to remain a dark spot.
While higher interest rates have helped banks earn more on loans, borrowers have shied away from refinancing their loans, hurting mortgage business across the banking industry.
Wells Fargo's shares were down 2.1 percent in premarket trading. Shares of JPMorgan Chase and Citigroup, which also reported better-that-expected profits, were down about more than 2 percent.
Wells Fargo, the largest U.S. residential mortgage lender, recorded an 18.8 percent fall in mortgage banking income to $1.15 billion.
JPMorgan, its closest rival in mortgage banking, posted a 41 percent decline in mortgage fees and loan servicing revenue.
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Wells Fargo's total revenue remained flat at $22.17 billion and missed analysts' average estimate of $22.47 billion.
Mortgage banking was not the only drag. Wholesale banking was particularly weak, with noninterest income falling by 21 percent to $2.67 billion.
The bank attributed the decline to the $290 million sale of a health benefit service business a year ago, as well as lower results from trading and principal investing.
However, it was not all gloom for the third-largest U.S. bank by assets. Net interest income, a measure that reflects earnings relative to funding costs, rose 6.4 percent to $12.48 billion.
The U.S. Federal Reserve raised interest rates for the second time this year in June, and indicated another possible hoist this year.
The bank also set aside less money to meet any future loan losses. Provisions nearly halved to $555 million, helped by an improving energy loan portfolio.
Net income rose 4.5 percent to $5.40 billion, or $1.07 per share, in the quarter ended June. 30, beating the average analyst estimate of $1.01, according to Thomson Reuters I/B/E/S.
Wells Fargo has also been struggling with high costs as it battles lawsuits related to a sales scandal last year, which involved employees creating millions of unauthorized accounts in customers' names to meet sales targets.
The San Franscisco-based lender said noninterest expenses rose about 5 percent to $13.54 billion.
"We continued to make progress this quarter in our efforts to rebuild trust ... while there is still more work ahead of us, we are on the right track and I am confident about our future", Chief Executive Tim Sloan said.
The company doubled its cost-cutting goals in May and plans to reduce costs by $4 billion through the end of 2019.
(Reporting by Nikhil Subba in Bengaluru; Writing by Sweta Singh; Editing by Saumyadeb Chakrabarty)